Tag Archives: land tax

Unpacking taxes on foreign persons – the Australian vacancy fee

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Clip Royalty Free Stock Country Passport Stamps Clipart – Australia @seekpng.com

Laws reflect perspective. When the imposition of laws, especially taxes, turns on whether the taxpayer is a local (resident) or foreign (non-resident) then laws will be designed with elusion in mind so someone cannot elude being treated as:

  • local if the burden and focus of the law (such as a tax) falls on locals; and
  • foreign if the burden and focus of the law falls on foreigners.

Income tax – focus on locals

The Income Tax Assessment Act (C’th) (ITAA) 1936 overall might be considered to be in the former case in Australia. Although Australian non-resident income tax rates can be higher than resident rates, generally a wider range of activity of residents is taxable in Australia, and residents are subject to income tax on their worldwide income. Income tax collection under the ITAA 1936 and 1997 is mainly focussed on collecting income tax from residents. Certainly Australian locals can be income taxed with fewer international constraints.

Thus who is a “resident” or “resident of Australia” in the definition of these terms in sub-section 6(1) of the ITAA 1936  includes, among others: an Australian citizen whose domicile, by virtue of that citizenship, is in Australia unless the Commissioner of Taxation is satisfied the person’s permanent place of abode is outside of Australia. This definition part imposes a satisfaction hurdle without which an Australian citizen, with a domicile in Australia, will be an income tax resident with broad exposure to income tax under the ITAA 1936 and 1997.

Foreign acquisitions and takeovers – focus on foreigners

In contrast the burdens imposed by the Foreign Acquisitions and Takeovers Act (C’th) 1975 (FATA) in Australia are on foreigners and is so, along with the state and territory foreign person surcharges mentioned below, an example of the latter case in Australia. The FATA is concerned with the acquisition, monitoring and control of Australian real estate and other Australian-based investment interests by foreigners. The FATA obliges notification to the Foreign Investment Review Board (FIRB) of proposed acquisitions of specified types which can be approved or rejected by the Australian Treasurer on the recommendation of the FIRB.

Vacancy fee

A vacancy tax on foreigners commenced under the FATA as a measure to improve housing affordability for Australian locals in 2017. The vacancy fee is contained in Part 6A of the FATA under which a foreign person who owns a residential dwelling in Australia is charged an annual vacancy fee where the dwelling is not residentially occupied or rented out for more than 183 days in yearly periods which measure from the date of acquisition of ownership by the foreigner. The vacancy fee under Part 6A is imposed as a tax by section 5 of the Foreign Acquisitions and Takeovers Fees Imposition Act (C’th) 2015.

Vacancy fee rates

Vacancy fee rates are tethered to the FIRB fees (also imposed as taxes under the same section 5) applicable to a foreign person making an application to acquire the residential land. which is ad valorem based on the value of the real estate on acquisition. Here is an extract from a table with the ad valorem fees:

Acquiring an interest in residential land where the
price of the acquisition is…		Fee payable
less than $75,000$2,000
between $75,000 – $1,000,000$6,350
between $1,000,001 – $2,000,000$12,700
between $2,000,001 – $3,000,000$25,400
from FIRB Guidance 10 Fees on Foreign Investment Applications (18 Dec 2020)

Under section 4 of the FATA:

“foreign person” means:
(a) an individual not ordinarily resident in Australia; or
(b) a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or
(c) a corporation in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest; or
(d) the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or
(e) the trustee of a trust in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest; or
(f) a foreign government; or
(g) any other person, or any other person that meets the conditions, prescribed by the regulations.

section 4 of the FATA

It follows that any person, including an Australian citizen, can be a foreign person caught by these provisions however, under a convoluted exemption arrangement, Australian citizens who are not ordinarily resident in Australia are relieved from the vacancy fee.

Relief for non-resident Australian citizens

I understand that the relief works in this way:

Section 28 of the Foreign Acquisitions and Takeovers Regulation 2015 [Select Legislative Instrument No. 217, 2015] (FATR 2015) prescribes every section of the FATA, aside from the definition of foreign person in section 4 itself and other provisions to which that definition relates to, as excluded provisions. (Bold emphasis added by me.)

Section 28 also carries a note which provides:

The effect of this Division is that acquisitions of interests of a kind mentioned in this Division are not significant actions, notifiable actions or notifiable national security actions, but are taken into account for the purposes of the definition of foreign person in section 4 of the Act.

Note to section 28 of the FTAR 2015

and

paragraph 35(1)(a) of FATR 2015 provides:

Acquisitions of any land by persons with a close connection to Australia

(1)  The excluded provisions do not apply in relation to an acquisition of an interest in Australian land by any of the following persons:

(a)  an Australian citizen not ordinarily resident in Australia;

…

paragraph 35(1)(a) of FATR 2015

There does not appear to be any further “close connection”, as referred to in the heading to section 35, required to trigger the exemption beyond being an Australian citizen in the case of paragraph 35(1)(a). That is: a non-resident Australian citizen has, by virtue of being a citizen, a close connection to Australia.

Application of the non-resident Australian citizen exemption to the vacancy fee?

The vacancy fee, though, is a tax imposed on a foreign person when a dwelling, already acquired by the foreign person, is not residentially occupied or rented out for more than 183 days in yearly period as stated above. Could it be that a foreign person, including a non-resident Australian citizen, will still be caught by the vacancy fee because the vacancy fee is concerned with omission to occupy or rent out property for more than 183 days over a yearly period and not with acquisition of the property so paragraph 35(1)(a) relief can’t be attracted?

The answer appears to be in section 115B of the FATA which scopes when vacancy fee liability under Part 6A arises. Section 115B provides:

Scope of this Division–persons and land
(1) This Division applies in relation to a person if:
(a) the person is a foreign person; and
(b) the person acquires an interest in residential land on which one or more dwellings are, or are to be, situated; and
(c) either:
(i) the acquisition is a notifiable action; or
(ii) the acquisition would be a notifiable action were it not for section 49 (actions that are not notifiable actions–exemption certificates).
Note: Regulations made for the purposes of section 37 may provide for circumstances in which this Division does not apply in relation to a person or a dwelling….

sub-section 115B(1) of the FATA

It follows that the provisions of “this Division”, which is Division 2 of Part 6A of the FATA and which contains the provision imposing vacancy fee liability, are excluded provisions and so vacancy fee liability on an omission to occupy or rent residential land, where the interest in that residential land was acquired by a non-resident Australian citizen under paragraph 35(1)(a) of FATR 2015, is not attracted by a non-resident Australian citizen purchaser of the residential land. That is so even though a non-resident Australian citizen is a foreign person caught by paragraph 115B(1)(a).

This is a very complicated way to exempt non-resident Australian citizens from treatment as foreigners. Couldn’t section 4 of the FATA just carve out non-resident Australian citizens from being foreign persons to broadly the same effect?

Adding to the confusion is FIRB Guidance Note 31 Who is a foreign person (1 July 2017) which refers to paragraph 15 of the decision in Wright v. Pearce (2007) 157 CLR 485 as guidance on the position with Australian citizens. This reference is actually in error and should be Wight v. Pearce (2007) 157 FLR 485 (not a decision of the High Court of Australia). In any case I can’t see where that reference has anything to say about resident and non-resident Australian citizens having a close connection to Australia, which, unlike being ordinarily resident in Australia which is the matter under consideration at paragraph 15 of the case, is the apparent touchstone of liability when paragraph 35(1)(a) of FATR 2015 is taken into account.

Comparison of the federal vacancy fee with state foreign person surcharge land tax and surcharge purchaser duty

The vacancy fee can apply over and above the foreign person surcharge land tax and surcharge purchaser duty imposed by Australian states introduced at around the same time also to achieve housing affordability for Australian locals.

The foreign person surcharges in New South Wales also adopt the “foreign person” formulation in section 4 of the FATA to pinpoint foreigners liable to the surcharges but with modifications including under paragraph 104J(2)(a) of the Duties Act (NSW) 1997:

(a) an Australian citizen is taken to be ordinarily resident in Australia, whether or not the person is ordinarily resident in Australia under that definition,

paragraph 104J(2)(a) of the Duties Act (NSW) 1997

which carves out non-resident Australian citizens from “foreign persons” and thus the complexity of excluded provisions from the FATR 2015, a Commonwealth statutory instrument, do not need to be contended with to find exemption for non-resident Australian citizens from the surcharges.

In making a comparison between the the federal vacancy fee on the one hand with state foreign person surcharge land tax on the other hand it should also be observed that the state foreign person land tax surcharges are generally imposed on foreigners per se, that is: whether the residential land is vacant for a period is immaterial. So omission by a foreign person to occupy or rent out property for more than 183 days generally means liability for both the federal vacancy fee and a state land tax surcharge will be attracted.

Temporary residents

When an individual owner of residential real estate is not an Australian citizen then whether the individual is ordinarily resident in Australia does become a touchstone for tax and surcharge liability as a “foreign person”. Sub-section 5(1) of the FATA provides:

(1)  An individual who is not an Australian citizen is ordinarily resident in Australia at a particular time if and only if:

(a) the individual has actually been in Australia during 200 or more days in the period of 12 months immediately preceding that time; and

(b)  at that time:

  (i)  the individual is in Australia and the individual’s continued presence in Australia is not subject to any limitation as to time imposed by law; or

  (ii)  the individual is not in Australia but, immediately before the individual’s most recent departure from Australia, the individual’s continued presence in Australia was not subject to any limitation as to time imposed by law.

Sub-section 5(1) of the FATA

A temporary resident for tax is someone who is not an Australian citizen or permanent resident who can stay in Australia under an immigration visa which, as a matter of course, will be a visa with a limitation as to the time the holder can stay in Australia.

A temporary resident is taxable for income tax only:

  • on income derived in Australia; and
  • on foreign income but only foreign income earned from employment or services performed overseas while a temporary resident.

A temporary resident is not income taxable on capital gains made on assets which are not Taxable Australian Property e.g. real estate.

See the ATO website here: https://is.gd/DbJJmk

A temporary resident is a foreign person under the FATA no matter how long the individual is present in Australia until and unless the temporary resident becomes a permanent resident or an Australian citizen due to paragraph 5(1)(b) of the FATA as set out above.

Temporary residents can acquire residential real estate, including established residential premises with conditions, under the FATA and FIRB regime however the vacancy fee and the state and territory foreign person surcharges can apply to their interests in Australian residential land.

Permanent residents

As permanent resident visa holders are not subject to any limitation as to time they can be in Australia imposed by law the requirements in paragraph 5(1)(a) of the FATA are of ongoing concern to them until and unless they become Australian citizens. That is: a permanent resident who has not actually been in Australian for 200 days in the applicable preceding twelve months is taken not to be ordinarily resident in Australia despite their visa.

If such a permanent resident owns Australian real estate but has not been in Australia for the required 200 days in an applicable twelve months then he or she is a foreign person for that year. Then the vacancy fee and the state and territory foreign person surcharges can apply to a permanent resident’s interests in Australian residential land.

Foreign purchaser stamp duty and land tax surcharges – design faults & unit trusts

DesignFault

Advent of the state foreign person property surcharges

Foreign person surcharges have applied on New South Wales, Victoria, Queensland, Tasmania, Western Australia and Australian Capital Territory property taxes following Commonwealth action to have the Foreign Investment Review Board more closely monitor the acquisition and holding of Australian real estate by foreign interests: see our July 2016 blog post:

Australia is now tracking & surcharging foreign buyers of land

https://wp.me/p6T4vg-56

NSW surcharges and current rates

In NSW, surcharges imposed since 2016 are:

(a)          a surcharge purchaser duty (currently 8% of the market value of the property) on the acquisition of residential property in NSW (Chapter 2A of the Duties Act (NSW) 1997 [DA]); and

(b)          a surcharge land tax (currently 2% of the unimproved value of the land) for  residential property in NSW owned as at 31 December each year (section 5A of the Land Tax Act (NSW) 1956).

(Surcharges)

The foreign trusts that aren’t foreign problem

Discretionary trusts with all or predominantly Australian participants and entitled beneficiaries can nevertheless be caught as foreign trusts that must pay the Surcharges. Liability for the Surcharges is based or grounded on sub-section 18(3) of the Foreign Acquisitions and Takeovers Act (C’th) 1975 (FATA): Sub-section 18(3) provides:

For the purposes of this Act, if, under the terms of a trust, a trustee has a power or discretion to distribute the income or property of the trust to one or more beneficiaries, each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary.

sub-section 18(3) of the Foreign Acquisitions and Takeovers Act (C’th) 1975

If the income or property (capital) that could be distributed to a foreign beneficiary of a trust is 20% or more of income in a year or property of the trust, the trust is foreign for FATA and Surcharge purposes. An ameliorating aspect of the Surcharges legislation is that:

  • Australian citizens who are non-residents of Australia; and
  • some New Zealand citizens with certain Australian visas;

who are foreign persons under the wide sweep of sub-section 18(3) of the FATA are excluded from being foreign persons for NSW Surcharges purposes: see sub-section 104J(2) of the DA.

The lengthy transition

Even for those not averse to the idea that foreign individual and foreign trust investors should pay higher property dues the implementation of the Surcharges in NSW has been agonising. Even now, in 2020, four years after liabilities for Surcharges were first imposed under the DA and the LTA the State Revenue Legislation Further Amendment Act (NSW) 2020 (“SRLFAA”) is still needed to phase in the Surcharges, and transitional relief from them, as they apply to trusts.

As well as imposing the wide sweep of what the FATA treats as foreign, the SRLFAA:

  • imposes impugnable trust deed requirements on discretionary trusts (see below); and
  • extends transitional arrangements that were set to end on earlier dates in versions of Revenue Ruling G010 from Revenue NSW and the State Revenue Legislation Further Amendment Bill (NSW) 2019.

Trust deed requirements on discretionary trusts

Where a trust is a discretionary trust for Surcharge purposes then the SRLFAA requires that the terms of the trust must be amended by 31 December 2020 so:

(a) no potential beneficiary of the trust is or can be a foreign person [the no foreign beneficiary requirement]; and
(b) the terms of the trust cannot be amended in a manner so a foreign person could become a beneficiary [the no amendment requirement];

and then only does the discretionary trust, even a discretionary trust that:

  • has no foreign participants or beneficiaries; and
  • thus is not foreign after the FATA wide sweep and sub-section 104J(2) of the DA are considered;

(a Local DT) escape treatment as a foreign trust for Surcharge purposes.

Why the no amendment requirement?

The object of the no amendment requirement is to impose the Surcharges based on the contingency or possibility only that a Local DT may come to have a foreign beneficiary in the future. The position of Revenue NSW is understood to be that Revenue NSW does not have the compliance resources to monitor Local DTs for foreign beneficiaries into the future on an ongoing basis.

Although nearly all discretionary trust deeds contain some kind of variation power, a design fault of such resource-saving requirements viz.:

  • the “irrevocable” requirement of Revenue NSW in paragraph 6 of Revenue Ruling DUT 037 concerning sub-section 54(3) of the DA concerning concessional duty on changes of trustee; and
  • the no amendment requirement now in the SRLFAA;

is that the variation power in many or most trust deeds of trusts in NSW may not permit modification of the variation power to satisfy either of these requirements.

Changing the scope or amending the terms of a trust amendment power

In Jenkins v. Ellett, Douglas J. of the Queensland Supreme Court stated the relevant law and learning about changing the variation power in a trust deed:

[15] The scope of powers of amendment of a trust deed is discussed in an illuminating fashion in Thomas on Powers (1st ed., 1998) at pp. 585-586, paras 14-31 to 14-32 in these terms:

“In all cases, the scope of the relevant power is determined by the construction of the words in which it is couched, in accordance with the surrounding context and also of such extrinsic evidence (if any) as may be properly admissible. A power of amendment or variation in a trust instrument ought not to be construed in a narrow or unreal way. It will have been created in order to provide flexibility, whether in relation to specific matters or more generally. Such a power ought, therefore, to be construed liberally so as to permit any amendment which is not prohibited by an express direction to the contrary or by some necessary implication, provided always that any such amendment does not derogate from the fundamental purposes for which the power was created ….It does not follow, of course, that the power of amendment itself can be amended in this way. Indeed, it is probably the case that there is an implied (albeit rebuttable) presumption, in the absence of an express direction to that effect, that a power of amendment (like any other kind of power) cannot be used to extend its own scope or amend its own terms. Moreover, a power of amendment is not likely to be held to extend to varying the trust in a way which would destroy its ‘substratum’. The underlying purpose for the furtherance of which the power was initially created or conferred will obviously be paramount.”

Jenkins v. Ellett [2007] QSC 154

In our experience a small minority of trusts in NSW have a variation power which expressly permits extension of its own scope or amendment of its own terms. That kind of extended power can raise its own set of difficulties which explains why these extended variation powers are not especially popular. It follows, as stated, that a substantial number of variations of the terms of discretionary trust deeds which the no amendment requirement imposes are prone, or likely, to be beyond the power conferred by the variation power of the trust and thus ineffective on a trust by trust reckoning.

discretionary trust for Surcharges purposes

In section 1 in the dictionary of the DA a discretionary trust is defined for DA and Surcharges purposes:

“discretionary trust” means a trust under which the vesting of the whole or any part of the capital of the trust estate, or the whole or any part of the income from that capital, or both–
(a) is required to be determined by a person either in respect of the identity of the beneficiaries, or the quantum of interest to be taken, or both, or
(b) will occur if a discretion conferred under the trust is not exercised, or
(c) has occurred but under which the whole or any part of that capital or the whole or any part of that income, or both, will be divested from the person or persons in whom it is vested if a discretion conferred under the trust is exercised.

section 1 of the dictionary of the Duties Act (NSW) 1997

More time to check for unexpected foreign trust treatment

With time extended to 31 December 2020 by the SRLFAA to amend trust deeds so a discretionary trust won’t be treated as a foreign person it is timely during the remainder of 2020 to also check the terms of residential land holding trusts that may not ordinarily be thought of as a discretionary trust.

A trust, including a unit trust, that contains powers in its terms which:

  • allow for a beneficiary to be selected by someone to take income or capital;
  • allow for the amount of income or capital a beneficiary is to take to be set by someone;
  • which can change the income or capital a beneficiary will take if the discretion is not exercised; or
  • which can divest a beneficiary of an interest in income or capital which they otherwise would take;

that brings the trust within a discretionary trust in section 1 of the dictionary of the DA needs to meet the no foreign beneficiary requirement and the no amendment requirement in the SRLFAA.

Hybrid trusts and other unit trusts

This definition brings in trusts known as hybrid trusts within this construct of discretionary trust. Shortly stated a hybrid trust is a tax aggressive structure where unit or interest holders have standing vested interests in income or capital of the trust but where, usually, the trustee has a supervening power or powers to divest those interests in income, capital or both in favour of other beneficiaries such as family or related companies or trusts controlled by the unit or interest holder with the standing interest.

Other unit trust arrangements can be treated as a DA discretionary trust even where the discretion is historical, redundant and income tax benign. For instance an older style standard unit trust may be set up by way of initial units and the trustee may be given a discretion in the trust deed not to distribute income or capital to initial unitholders once ordinary units in the trust are issued.

This discretion in the terms of a trust is enough for the unit trust to be treated as a discretionary trust so it would be prudent for the terms of the unit trust to be amended to remove the discretion if that can be done:

  • without resettling the trust; and
  • less onerously than amending the trust deed to comply with the no foreign beneficiary requirement and the no amendment requirement.

SMSFs getting practical to invest in land with others

The force of the superannuation law is that investment in land by a SMSF needs to be prudent. An investment needs to be considered in a business-like way.

Limited recourse borrowing is one way to fund investment in real estate. SMSF principals may prefer to arrange equity investment from private connections outside of the SMSF.

Investment as a tenant-in-common?

I am frequently asked about SMSFs participating in land investments as a tenant-in-common with related and unrelated entities of the principals of the SMSF. It is apparent from the NTLG Superannuation sub-committee technical minutes of June 2011, released by the Australian Taxation Office, that tenants in common arrangements for SMSFs are not going to be prudent for the SMSF without careful and restrictive implementation. Wherever other tenants in common could borrow, or use or risk their interest as security, the SMSF tenant-in-common is exposed to uncontrolled risks which would bring into question, for instance, whether the SMSF:

1.    has acted prudently pursuing the investment for members for whom it is bound to provide;

2.    has breached regulations which prevent charges, or the potential for them, being taken over SMSF property; or

3.    has satisfied the sole purpose test.

Investment through a trust?

The tenant-in-common option is frequently turned to because of the restrictive regime that has applied in relation to the investment by SMSFs in related trusts since 1999. Shortly stated, a post 1999 investment by a SMSF in a trust, which is related to the principals of the SMSF, a “related trust”, is treated as an “in-house asset” and more than 5% of the assets of a SMSF in in-house assets can leave the SMSF non-complying.

Non-geared unit trust – expressly relieved from being a related trust

The SIS Regulations provide an express exception. A superannuation fund can invest in a non-geared unit trust (NGUT) to which Regulation 13.22C applies without the NGUT being taken to be a “related trust” and thus the investment isn’t taken to be an investment in an “in-house asset”.

This express exception is especially limited and, aside from relief from “related trust” treatment causing in-house asset difficulty, offers no expansion in the kind of investment that can be pursued with superannuation money. In other words, the investment still needs to address 1 to 3 above, for instance.

The Regulation 13.22C and 13.22D requirements and restrictions on NGUTs essentially mirror the restrictions on regulated superannuation funds. NGUTs cannot borrow and they can only “lend” to operate a bank account. They cannot secure or charge their assets. (A non-SMSF unit holder in a NGUT could give a security over his, her or its units but security could not be given over the assets of the NGUT.) A NGUT cannot run a business – unlike with superannuation funds, this is a direct requirement. Loss of NGUT status, so that the NGUT becomes a related trust triggering in-house asset difficulties follows the merest breach under Regulation 13.22D which can put complying status of a SMSF investor at the mercy of the ATO.

Practicalities

1.    Nevertheless a carefully implemented NGUT can be the most practical way to pursue unitised investment in land by related parties and unrelated parties of a SMSF with the SMSF.

2.    Compliance with the regulations needs to be closely monitored as stated. Any debtor or creditor, aside from a bank for the (credit only) trust bank account, potentially causes loss of protection from related trust status. Funding of, and money flow to and from, the NGUT without breaching the rules is thus practically challenging. The trustee needs to raise equity (unit) funding whenever any extra funding is required. From a practical and paperwork burden perspective, using partly-paid units is a strategy that might be considered wherever the trust needs a flexible equity facility.

3.    The activity of the NGUT that invests in land also needs to be monitored and carefully planned and structured. It is possible for real estate activity by trustees to be considered the carrying on of a business under tax rules. As stated a NGUT cannot carry on a business under the NGUT regulations nor, if it has a trust deed to suit, under its trust deed.

4.    Under the special trust rules in NSW, a special trust pays land tax at the highest land tax rate without a threshold. A SMSF can attract a better land tax rate. A NGUT will not automatically qualify for the rate for a SMSF to the extent a SMSF invests in it. However if the NGUT is a “fixed trust” under the land tax rules then a better rate than the special trust rate can be achieved. Hence there can be advantage to structuring a NGUT with a trust deed so that the NGUT can be treated as a fixed trust under the land tax rules.

5.    A carefully crafted trust deed can be very useful to assist the trustees of a SMSF and a NGUT to keep within the express requirements and restrictions on NGUTs.

Australia is now tracking & surcharging foreign buyers of land

Turning missing demographics into tax revenue

Hats off to Australian governments who have turned an imperative into a revenue opportunity. The Australian federal government regulator, the Foreign Investment Review Board  (the FIRB), has not been well placed to track foreign purchases of real estate to date. The FIRB has been reliant on disclosure, and if prospective foreign buyers didn’t voluntarily disclose their planned land acquisitions, the FIRB has been none the wiser. There has been no register of (foreign) beneficial ownership of buyer entities which the FIRB can go and check even in the case of foreign real estate acquisitions completely prohibited under the foreign acquisitions law: the Foreign Acquisitions and Takeovers Act (C’th) 1975.

That has all changed. Buyers now need to demonstrate that they are not foreign to avoid hiked stamp duty in New South Wales, Victoria and Queensland. Foreigners who buy and sell Australian real estate are now under great scrutiny at both the buyer and seller ends of the land sale especially if the sale is for more than $750,000.

Big city real estate markets are buoyant, prices are high and foreign buyers are not exactly welcome by those looking to buy the same city real estate. The community has been surprised to learn that foreign purchases of Australian land have not been closely monitored. So, politically, it has been an opportune time to introduce these changes. Time will tell if they will be successful. They may well be. They will be a boon to the FIRB, but Australian buyers too will get caught up in the ramp up of imposts on foreign buyers. Why?

Buyers of Australian land

This is the bit for the FIRB. The New South Wales, Victorian and Queensland governments have just introduced hefty stamp duty and land tax surcharges on foreigners. From 21 June, 2016 a sworn Purchaser Declaration (“PD”) is now required from buyers, whether foreign or not, buying real estate in New South Wales. The PD is required along with stamp duty at the band the PD establishes that the buyer should pay to complete the conveyancing of a land sale. If the buyer of land in New South Wales is a foreign person (entity):

  • a 8% SURCHARGE (for the 2018 tax year, it was 4% for the 2017 tax year) on the stamp duty (i.e. extra) applies (it’s a 7% surcharge in Victoria);
  • the buyer is not entitled to the 12 month deferral for the payment of stamp duty for off-the-plan purchases of residential property; and
  • the buyer faces 2% SURCHARGE (for the 2018 tax year, it was 0.75% for the 2017 tax year)  on land tax (i.e. extra).

It’s plain on the PD that the information is going to the ATO – it asks for the FIRB application number for the purchase. This will let the Australian Taxation Office (“ATO”) and the FIRB gather comprehensive data on foreign land acquisitions. Coupled with significantly increased penalties for breach of the foreign acquisitions rules, the availability of this information to the ATO and to the FIRB will give the federal government real capability to penalise unlawful real property acquisitions by foreigners.

Where an Australian buyer will be caught out too – example of a buyer that is an Australian-based family discretionary trust

It is notable that the PD doesn’t seek the confidential tax file number (understandable as the ATO can’t get the States to collect those) or the Australian Business Number (if any) of a buyer trust. It relies on the name of the buyer trust and a copy of the trust deed of the buyer trust with all amendments must be included with the PD.

If a foreign individual, company or trust is a potential beneficiary of the usual style of Australian family discretionary trust that is a New South Wales land buyer then, usually, the trustee can distribute 20% or more  (Victoria – more than 50%) of the income and capital to that foreign person. That gives the foreign person a “significant interest” in the trust enough to cause the trust to be a foreign trust under these rules to whom the foreign stamp duty and land tax surcharges apply.

So if the copy trust deed supplied with the PD indicates that a remoter family member,  who is not an Australian citizen or an Australian permanent resident, but is a foreigner who is a potential beneficiary of an (otherwise) Australian family discretionary trust ABLE to receive 20% of income or capital (more than 50% in Victoria), even if that remoter family member/foreigner may not have:

  • any current or past entitlement to income or capital of the trust; nor
  • any strong likelihood of participating in income or capital of the trust;

his or her eligibility under the trust deed exposes the trust to foreign trust/person status and liability for the stamp duty and land tax surcharges under these rules accordingly.

Sellers of Australian land

The ATO has had a problem collecting capital gains tax from sellers who are offshore after the sale of Australian land. Under tax treaties worldwide rights to tax interests in land are almost universally reserved to the governments where the land is. As other forms of assets and activity are moveable and relocatable taxation based on place is not so reserved because it is less effective than taxation based on residence and/or makes less sense.

So, frequently, when a non-resident sells land and makes a capital gain taxable in Australia, the ATO has no interaction with the non-resident, aside from due to their Australian landholding. This has often left the ATO with little leverage to assist them to collect tax debts arising from CGT on disposals of Australian land by non-residents ceasing investment in land in Australia.

The solution is the tried and trusted withholding tax model. From 1 July, 2016, the non-resident capital gains tax withholding tax (“NCGTWHT”) is an obligation on the buyer (statistically likely to be a resident) to pay a non-final withholding tax to cover capital gains tax (likely to be) owing by the non-resident seller.

The NCGTWHT broadly applies as a non-final tax on sales of land worth more than $750,000 (from 1 July 2017, was $2m from 1 July 2016 to 30 June 2017). If the buyer does not receive an ATO clearance certificate from the seller then the buyer must withhold 12.5% (from 1 July 2017, was 10% from 1 July 2016 to 30 June 2017) of the value of the property (so 12.5% of the price for the land if it is an arms length sale, 12.5% of the “first element of the cost base” of the land to the acquirer if a CGT market value substitution rule applies in a non-arms length transaction).

Where an Australian seller will be caught out too – a non-final 12.5% tax

It is of no consequence that the seller is, or might be, an Australian resident/tax resident and the buyer is assured of this. There is no “reason to believe the seller is an Australian resident” exception for sales of freehold interests in land. Even the seller could be wrong – tax residence can a vexed question which is frequently litigated in tax cases.

The liability to the ATO is on the buyer unless the seller can obtain and provide a clearance certificate from the ATO to the buyer no later than settlement of the land sale so, if the seller does not return and pay the CGT on the seller for the sale, the NCGTWHT paid by the buyer on the seller’s behalf won’t be refunded.

Template contracts for the sale of land across Australia have been hastily adjusted to include conditions confirming that, where the land is worth more than $750,000:

  • the buyer can contractually withhold the NCGTWHT from the price if the clearance certificate is not provided; and
  • the seller can be assured that the NCGTWHT will be paid immediately by the buyer to the ATO to the credit of the seller.

NCGTWHT